nikhilessar asks a question that has been bugging me for a while.There are several factors, enough that corporate bonds should not all move in the same way, but as far as I can tell, most still seem to be pricing relative to the sovereign debt of that country, with little adjustment for their individual mix of exposures.Some will actually benefit from current events, others be broadly neutral, but of course government suppliers are going to get hurt.Inflation of some form may well come, some businesses will do well out of that, and overall I'm not going to pretend that I personally can do the factor model, but I don't see the people who do bonds for a living working it out either.

Hi,In case of an FCCB ( foreign currency convertible bond) I am seeing this peculiar need for adding soverign spread to Corporate CDS spread no matter what model I use, why this is the case. What can be the possible reasons. Is it because Convertibles take into account ADR/GDR , which in turn are intricately linked with domestic equity prices through the arbitrage thus necessarily bringing into the equation the exchange rate. Or is it because of something else.

I have seen some cases where several companies continued paying their debt at the same time that the sovereign went bankrupt. Therefore, I agree with the idea that a company could have a better credit risk than the sovereign. However, I don?t think the relationship can go too far away since the business in which the company is involved also depends on who set the rules. So, yes a CDS spread should take into account the sovereign risk even if the later is above the former.

QuoteOriginally posted by: nikhilessarHi,In case of an FCCB ( foreign currency convertible bond) I am seeing this peculiar need for adding soverign spread to Corporate CDS spread no matter what model I use, why this is the case. What can be the possible reasons. Is it because Convertibles take into account ADR/GDR , which in turn are intricately linked with domestic equity prices through the arbitrage thus necessarily bringing into the equation the exchange rate. Or is it because of something else.Is there foreign currency convertible bond rate can be underlying of the CDS? and in this case how does premium is defined?